New IRS guidance addresses a situation where a governmental employer provides additional taxable compensation for employees with other health coverage who forego coverage under the group health plan provided by the government. We typically refer to this as "cash-in-lieu." We previously advised that the IRS had created a grey area in the law by failing to specify whether a cash-in-lieu arrangement could be considered an employer payment plan that must comply with the ACA's group health plan mandates. IRS Letter 2016-0023 advises that this type of arrangement does not constitute an employer payment plan or a health reimbursement arrangement. Therefore, this design does not result in a plan that is subject to the group market reforms. This means that employers who offer cash-in-lieu will not face penalties for failure to comply with the ACA's group health plan mandates. Such penalties are supposed to be self-reported by the employer. Although this provides some relief for employers who offer cash-in-lieu, employers with these arrangements still must consider the potential impacts cash in lieu has on (1) the affordability of coverage under the employer mandate (see http://www.lcwlegal.com/Cadillac-Tax-and-IRS-Guidance-on-ACA---Public and http://www.lcwlegal.com/IRS-Releases-Further-Guidance-on-Application) and (2) the calculation of the regular rate of pay for overtime purposes under the Fair Labor Standards Act (see http://www.lcwlegal.com/Flores-v-City-of-San-Gabriel). More information about group market reforms can be located in IRS Notice 2015-87.
In IRS Letter 2016-0019, the IRS responded to a question posed by a member of the U.S. House of Representatives regarding whether employers may reimburse premiums for an employee's individual health insurance policy on a tax-free basis. The letter notes, once again, that group health plans are subject to certain market reforms. One of the requirements of the market reforms is that a group health plan cannot impose an annual or lifetime dollar limit on essential health benefits. Accordingly, an arrangement where an employer reimburses medical expenses up to a fixed amount does not comply with the market reforms. An employer may make this type of arrangement compliant by combining that design with a group health plan that provides separate health coverage with no annual limits. However, if an employer does not offer the employee a group health plan and the employee obtains individual coverage on a health insurance exchange, the separate arrangement cannot be combined with any other coverage to determine if it satisfies the market reform rules for group health plans.
IRS Letter 2016-0023 can be found at: https://www.irs.gov/pub/irs-wd/16-0023.pdf.
IRS Letter 2016-0019 can be found at: https://www.irs.gov/pub/irs-wd/16-0019.pdf.